Funny Money Ain't No Joke
Don't use your currency. Use ours.
Rudi Dornbusch says small economies should forget monetary independence and throw in their lot with an established currency.
When new nations are born, the first thing they do is create a new currency. Whether it is called the peso or the hrvnya, it is bound to be pathetic. Few of these currencies rise to distinction; more likely, the number of zeros will increase steadily as ever more patriotic images are printed on the back of the bill to make up for the declining purchasing power. Such is the price of misconceived national identity.
Even if it is the steady inflation of 60 to 100 per cent that Turkey has been living with, or the single digit inflation of some better behaved transition economies, the basic question remains: why do emerging economies insist on managing their own central banks?
Democratic money is bad money. The past decade has witnessed the rise of strong and independent central banks and the outsourcing of money. Countries such as Italy have narrowly escaped public sector bankruptcy by surrendering their monetary authority to the European Central Bank. In France, where the situation was somewhat less precarious, the surrender first to the Bundesbank and then the ECB has been no less unconditional and clearly for the better.
There is a message here for Europe's peripheral nations. National dilettante management of currencies is too expensive, particularly for poor countries aspiring to international respect and prosperity.
The present hype in capital markets suggests two unusual ways of putting a bright new face on a bad currency. The first strategy is a friendly takeover. The obvious candidate for such a move is the International Monetary Fund, but that could be too low key. To maximise value, perhaps a better strategy would be to focus on the owners of designer labels. Could LVMH, which already owns Krug champagne and Louis Vuitton, be persuaded to add a Ukrainian brand, the hrvnya, to its stable?
An alternative asset market strategy builds on the suggestion of Larry Summers, the US Treasury secretary, who noted that just about anything that is called dot-com can boom without much effort. Why not, he asked, lift depressed currencies by dot-coming them? Would this strategy work for, say, Turkey as the country struggles to end its double-digit inflation and fiscal turmoil?
But there are risks with the dot-com ploy. High valuation is good but overvaluation brings new risks. Moreover, if dot-com assets crash, as many surely will, this would spell an early death for the country's stabilisation plan. Better to pursue the Italian strategy of using dot-euro.
Just how would this work? It takes the practical form of a currency board - the central bank no longer issues money except in the context of purchasing foreign exchange, and the exchange rate is rigidly and forever pegged to the euro. Interest rates collapse, inflation stops dead in its tracks, the limits of tolerance for mismanagement become very tight and politics is taken out of public finance. Soon, as in Greece today, the discussion is about the finer details of convergence rather than the vulgar possibility of public bankruptcy. Needless to say, the local stock market will boom, growth will pick up sharply and the finance minister will make the front covers of People, W and Euromoney. The president will get two full terms in office.
Crummy monies are out of fashion, cool money is in. No one believes devaluation is a step towards prosperity or that inflation creates jobs; nobody can possibly believe that printing money is a particularly intelligent way to finance government. Europe's peripheral countries want to join the European Union for trade integration so they can sell their vegetables, oranges and textiles. But currency stability is more important for prosperity. There is only one way to get it: unconditional surrender, close the central bank, give up funny money.
Opposition to this modest proposal comes from many quarters - not least from central bankers. Giving up a currency means a threat to perks and privileges. Even if the central bank is kept alive, prestige will be brutally eroded. (Just look at the demoralised provincial bank the Buba is today.) The financial sector is opposed because hard money means an end to living off inflation-distorted capital markets.
The future is not on their side. Europe is about to do away with the last vestige of bad money as francs and lira and the whole obscene reminder of political money are replaced by crisp, fresh and bright single-digit euros.
It makes it that much harder to make sense of an obscure central or southern European currency, whatever its name. How can you have faith in something called a Turkish lira - the very name lira is bad, and Turkey does not make it better. All the more true of the Ukrainian hrvnya. Even if nothing else works in a country, at least good money might be a change for the better.
The author is Ford Professor of Economics and International Management at the Massachusetts Institute of Technology.
The Financial Times, Jan. 3, 2000 |
